Top of the miner league

October 8, 2011

At the coalface ... industrial consumables have been a solid foundation for Ludowici. Photo: Robert Rough

A little-known company has all the tools to make an impact in 2012, writes Patrick Commins.
AFTER 150 years of operation, mining services company Ludowici might well be one of the oldest Australian businesses you've never heard of. But thanks to new management and the commodities boom, that may be all about to change.
The Queensland-based company has come a long way since its founder, John Ludowici, started a tannery in Sydney in 1858; its principal activities in 2011 centre on designing, manufacturing and selling technologically advanced equipment for mineral processing.
Despite its relative anonymity, it has a strong brand and long-standing reputation within its niche, which includes a variety of products for large engineering projects and industrial uses.
Its business is divided in two. The first is ''capital products'': a variety of equipment designed to separate minerals - primarily coal and copper but also gold, iron ore and mineral sands - from waste products, such as vibrating equipment and centrifuges. The company has also developed, in conjunction with the University of Newcastle, award-winning technology in its ''reflux classifiers'' - an example of Ludowici's strategy of innovation. The capital products segment comprises about 40 per cent of sales.
The second business division is ''consumable products'', which includes a variety of screens, seals and ceramic, rubber and polyurethane products for industrial uses. The fact that 60 per cent of revenue comes from consumables provides some certainty of income, as companies need to continue replenishing their supply of Ludowici's goods - one of the things that attracts Paul Hannan, who invests in the company through the small companies fund he manages for BT Investment.
It's no secret that it's a great time to be in the mining game, whatever your caper.
In their effort to feed the mammoth demand of industrialising giants, such as Asia and the Indian subcontinent, miners in Australia were set to spend $55.5 billion across the 12 months to June 2011 on capital goods including equipment and machinery, the Australian Bureau of Agricultural and Resource Economics and Sciences reported in May this year.
That's 53 per cent more than the previous year and indications are that about $74 billion will be spent during this financial year.
But even with the right conditions you need a skilled hand at the wheel and Ludowici appears to have found that in its chief executive, Patrick Largier. Analysts and investors credit Largier with driving the business's transformation since he was recruited in 2007 from Orica, where he was in charge of strategy and acquisitions.
In the three years under Largier, Ludowici has grown strongly, thanks to an efficiency drive led by the new CEO and a couple of successful and complementary acquisitions.
The company reported record operating profits in 2010 (the company rules off its accounts on December 31 rather than June 30) of $11.6 million - more than double the year before. Earnings from continuing operations on a per-share basis (or EPS) jumped 61 per cent to 44.8¢. The dividend increased 8¢ to 20¢ a share in 2010.
The company earned $160 million of its total $223 million in revenue in 2010 from Australia but the company is looking to expand its ''global footprint'', which includes North and Latin America as well as fledgling operations in Asia and Africa. Management plans to achieve this through organic means as well as through more acquisitions, the most recent example of which is a complementary business in South Africa.
A strong Aussie dollar erodes Ludowici's strong margins and makes its products less competitive internationally. But the company is investing in offshore manufacturing facilities in India to reduce currency risk and lower its cost base and plans to expand its productive capability in China (the company raised $10.7 million from the market in July for that purpose).
Despite Ludowici's promise, the company remains a minnow. It has a market capitalisation of only $101 million, which would classify it to investors as a ''small-'' or ''micro-cap'' stock. Smaller companies are generally a riskier proposition than their larger, more diversified peers but the burgeoning interest from the large broker analysts - as intimated above - means now could be a good time for individuals to be buying into the stock in anticipation of a higher market profile.
The stock looks to be good value. The consensus among the small (but growing) number of analysts covering the stock is for more moderate growth in EPS this year to 45.7¢ but then accelerating to 57¢ in 2012. On those numbers, and at a share price of $3.46, the stock is trading on a price/earnings ratio of just 7.6 times 2011 earnings and 5.9 times estimated EPS for 2012.
The fact that investors continue to factor in a major crash in commodity prices helps explain the low valuations. And, it must be said, that worst-case scenario cannot be ruled out in the short and even medium term thanks to the parlous economic condition of much of the developed world and the danger that a collapse in the euro, say, could temporarily derail the Chinese growth juggernaut. The company's shares are worth about 30 per cent less than they were at the start of the year.
But for more far-sighted and risk-tolerant investors who believe that China and India will continue to underwrite super profits in the resources sectors for the next decade and beyond, Ludowici could provide an attractive ''picks and shovels'' play on that theme.

Saturday, 8 October 2011

Top of the miner league October 8, 2011

Top of the miner league

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